Uncertain economic outlook sways bankers

August 4, 2025

The Federal Reserve’s Senior Loan Officer Opinion Survey (SLOOS) disclosed tighter bank lending standards for businesses of all sizes during the second quarter along with weaker business loan demand. For households, banks reported little change to lending standards and mixed loan demand.

For commercial and industrial (C&I) loans to businesses, banks reported tighter lending standards and weaker demand for firms of all sizes. Nearly 10% of banks tightened their lending standards for C&I loans to large and middle market firms (e.g., businesses with annual revenue of $50 million or more). For C&I loans to small businesses (annual sales of under $50 million), 8% of banks tightened standards. Standards were reportedly tightened due to an uncertain economic outlook and concerns about legislative and regulatory changes.

During the second quarter, 29% of banks reported weaker C&I demand from large and middle-market businesses. That compares to 20% of banks reporting weaker demand in the first quarter of the year. Weaker C&I loan demand for small businesses was reported by 28% of banks. Declining plant and equipment investment and decreased financing needs for inventory and mergers or acquisitions were cited as reasons for softer demand. Uncertainty related to tariffs was likely another reason. Responses for the survey were due by July 2, 2025; trade negotiations are still ongoing.

Banks reported tighter standards and weaker demand for all commercial real estate (CRE) loan categories, with 12% of banks reporting tighter standards. That is an increase from 11% in the prior quarter. On the demand side, 12% reported weaker demand versus 2% in the first quarter.

A special question was asked about the level of lending standards relative to the past twenty years. Banks stated that lending standards are tighter on average across all loan categories. Compared to last year, lending standards have eased except for residential real estate where lending standards are similar to July 2024.

For loans to households, lending standards were little changed during the last three months. Demand weakened for residential mortgage loans amid still elevated interest rates and an uncertain outlook. In place of residential mortgages, demand and lending standards for home equity lines of credit (HELOCs) increased. Instead of buying a new home, people are choosing to upgrade their current dwellings. This is particularly true of older homeowners who are opting to age in place as opposed to downsizing.

In the second quarter, 10% of banks reported tighter consumer credit card lending standards. At the same time, credit card demand weakened. Household balance sheets are showing more signs of strain across the income spectrum. That indicates credit card demand is likely to remain muted this year.

Consumer auto loan lending standards were essentially unchanged, while auto loan demand increased. That is likely due to ordering ahead of tariff related price increases in the second quarter of the year.

Lending standards for residential real estate (RRE) loans were little changed as demand weakened. Weaker demand for RRE loans was reported by 8% of banks. High mortgage rates and economic uncertainty produced a soft spring selling season.